Building Wealth and Credit for Teens and Young Adults: In-Depth Strategies

Navigating the world of finance can often feel like wandering through a maze for many of today’s youth in New Mexico and elsewhere — a labyrinth filled with potential pitfalls and brick walls. With the arrival of April’s Youth Financial Literacy Month, it’s the perfect moment to start turning those financial blind spots into clear and navigable paths to success.

Laying down a solid financial base from an early age is essential for achieving lasting financial stability and prosperity. Read on for practical strategies for growing wealth and building credit, with especially useful details for those getting started early in life.

The Importance of Starting Early

Financial planning and education at a young age is not just beneficial — it’s transformative. A solid understanding of core personal financial tenets empowers individuals to make informed decisions, leading to a lifetime of financial well-being. This proactive approach:

Encourages Savvy Financial Habits: Starting young instills a sense of financial discipline, promoting consistent saving and wise investing habits that pay dividends over time.

Facilitates Wealth Accumulation: The earlier one starts to save and invest, the more time money has to grow through the power of compound interest, exponentially increasing the potential for building wealth.

Enhances Credit Opportunities: Establishing good credit early on broadens access to financial products and opportunities, including more favorable loan terms and lower interest rates, an important advantage for large purchases.

Building Wealth

Think of wealth building as a marathon and not a sprint. Starting your journey into financial independence involves understanding the power of saving, the importance of investing, and the need to manage debt wisely. Below are strategies designed to guide teens and young adults through the initial stages of building a solid financial foundation:

Automate Financial Savings and Payments

Enabling autopay for regular expenses ensures that bills are paid on time, every time, preventing late fees and their negative impacts on credit scores.

By setting up automatic transfers from checking accounts to savings or investment accounts, a ‘set and forget’ strategy helps build a nest egg without the need for continuous management.

Invest Your Money in CDs and High-Yield Savings Accounts

Certificates of Deposit (CDs) are time-bound deposit accounts that offer a fixed interest rate for the duration of the term. CDs encourage savings discipline, as funds are locked in for the term, and generate a guaranteed return.

High-Yield Savings Accounts (HYSAs) offer significantly higher interest rates compared to traditional savings accounts, making them an attractive option for young savers. They serve as an ideal cache for emergency funds or short-term savings goals as the money is still accessible but grows at a faster rate than other checking or other accounts.

Understand Compound Interest

Compound interest is the process by which a sum of money grows exponentially over time, as interest is earned on both the principal and the accrued interest. This concept is crucial for young investors to understand, as it demonstrates the importance of starting early and letting time amplify returns.

At most financial institutions, interest on Certificates of Deposits are compounded monthly and paid out monthly. Although this can vary from one bank or credit union to another, this is what is most common. At Del Norte Credit Union, our Share Certificates accrue compounded interest daily and are paid monthly, helping the saver earn more money in less time. Be sure to check terms and conditions of CD’s and other savings products before deciding on the right one for you and your savings goals.

Eliminate and Avoid Debt

In today’s economy, avoiding debt entirely may not be realistic for most people. However, adopting a strategic approach to debt by prioritizing high-interest debts for repayment, avoiding unnecessary borrowing, and using credit wisely can prevent debt from undermining financial goals.

Building Credit

Building a strong credit history is like laying the foundation for a house; it supports all future financial endeavors. Teens and young adults have unique opportunities and challenges in this arena, but with a smart approach, they can establish a credit history that opens doors to financial freedom and opportunities:

Become an Authorized User on a Parent’s Credit Card

For those under 18, becoming an authorized user on a parent’s credit card can be an effective step toward building credit. This strategy allows teens to benefit from their parent’s established credit history, providing a head start in building their own credit score.

DNCU is home of the Score! Program for teens. Help your teen take their first smart financial steps with special savings dividends, free online educational courses, and an optional Score! Credit Card packed with perks, all under parental control and supervision.

Pay Student Loans on Time

Consistently making on-time payments on student loans is critical for building a positive credit history and demonstrating financial reliability, helping to create a strong credit score and a habit of strong financial discipline.

Just how much value will that college degree provide? Check out the guide to Exploring College Costs by Major for important insights into higher education in New Mexico and consider our tips on how you can start saving for your child’s college fund.

Consider a Credit Builder Loan

Credit builder loans differ from traditional loans because you essentially borrow from yourself rather than a lender. You start by opening an account with a bank or credit union, which then automatically transfers money from your checking account to a savings option, like a CD, monthly for 6 to 24 months. At the end of the term, you receive the money back. This process builds a positive payment history and improves your credit score without incurring actual debt.

Understand the Factors of Credit Score

Your credit score is influenced by several key factors, with payment history and credit utilization being the most significant. Payment history accounts for whether you’ve made credit payments on time, while credit utilization measures the amount of available credit you’re using. Together, these elements signal your financial reliability and ability to manage debt.

Other factors include the length of your credit history, which shows how long you’ve been managing credit, the mix of credit types you have, indicating your experience with various credit products, and the frequency of new credit inquiries and accounts.

Did you know that smart use of credit cards can improve your credit score? Get all the details in our Financial Fitness section.

Building Credit with Student Credit Cards

For young adults in college, student credit cards can be a valuable tool for building credit. These cards sometimes come with features tailored to students’ needs, such as lower interest rates and rewards for good grades. However, it’s crucial to use them wisely by keeping balances low and making payments on time to avoid accumulating debt and to positively impact credit scores.

Beyond building credit, responsibly using a student credit card can teach important financial lessons on budgeting, managing expenses, and understanding the cost of borrowing. It’s a practical introduction to credit that can prepare students for larger financial responsibilities post-graduation.

Credit cards are an important spending tool for many consumers but demand diligence and discipline – check out 10 Issues to Consider When Opening a Credit Card in 2024 and Things to Consider Before You Cancel a Credit Card.

Del Norte Credit Union is your ideal partner for a better future!

The journey to financial independence is both exciting and challenging, particularly for teens and young adults taking their first steps. By adopting the strategies outlined above, individuals can lay a solid foundation for wealth accumulation and credit building, essential components of financial health.

Open a Savings Account or Share Certificate with Del Norte Credit Union today to start growing your money. With branches located throughout northern New Mexico and Rio Rancho, outstanding member support, and convenient digital banking options, DNCU is the smart choice for savvy savers of all ages.

Disclaimer: This article is for informational purposes only. For advice regarding your specific financial situation, please consult a financial planner or a trusted financial professional.